Editorial: Funds for Innovation

Aug. 11, 2013 - 03:45AM
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When viewing this period in global security and the years between the two world wars, there are parallels.

After myriad lessons of World War I, militaries worldwide invested in new technologies, weapons, strategies and tactics despite relatively low defense spending levels.

That approach makes sense today, given fundamental changes in warfare as potential adversaries worldwide leverage technology in pursuit of asymmetrical advantages over the United States.

America must invest in stealth, unmanned systems, cyber, precision and long-range strike, along with space, missile defense, special operations and intelligence. In addition, investment should go toward robotics, 3-dimensional printing, new materials and nanotechnologies to improve military capabilities and the economy.

Unfortunately, up to $500 billion in automatic defense cuts over the coming decade will disproportionately hit readiness, research and development (R&D), and procurement as the Defense Department can’t cut people or drive reforms fast enough to generate needed savings.

DoD wants industry to boost investment and bring new technologies and products to the military, but leading US defense companies have been cutting independent research and development to buy back stock and return bigger dividends to shareholders.

Changing investor mindset on the value of R&D spending may be as difficult as reforming the Pentagon, with entrenched orthodoxies obstructing rational decision-making. Investors have grown very accustomed to having large amounts of cash thrown their way, which companies have used to mask limited growth potential in a difficult defense environment.

With most investors focused on short-term cash, longer-term investments that don’t immediately return revenue — as is the case with R&D — are being seriously shortchanged. Companies are keeping independent expenditures on R&D low — very low — around 1 percent of revenue in many instances.

That business model helps retain investor interest as defense spending drops, but it is also fraught with peril. CEOs today are reaping the benefits of R&D investments made decades ago, and any decrease in spending risks harming both the future of their companies and the security of the US as competitors such as Russia and China ramp up their defense expenditures.

And many of the dollars that companies are spending on R&D are directed at technologies that are largely mature. That results in incremental growth in technology but prevents the kind of transformative leaps that the US depends upon to stay ahead.

Kendall is right. Government has an obligation to invest in the future, but so does industry. And if industry steps up its investments in high-tech projects, the Pentagon must be ready to reward innovation, including higher margins on products that are transformative and performance that cuts the price of goods and services.

The United States boasts the world’s pre-eminent military thanks to many factors, including unparalleled government and industry investment to ensure a capable force; competitive, world-beating companies; and the nation’s overall economic health.